Optimal simple monetary policy rules for a resource-rich economy and the Zero Lower Bound

Andreyev M., Polbin A.

In this article, we study the optimal simple monetary policy rules under a Zero Lower Bound (ZLB) using a DSGE model. The modeled economy is open and highly dependent on the terms of trade (TOT). Economic dynamics is the result of a TOT shock and an external interest rate shock. Using impulse response functions, we show that the presence of the ZLB reduces the impact of positive external shocks. This means greater growth in real interest rates and lesser growth in consumption and production. The monetary authority minimizes the volatility of key macroeconomic indicators. The optimal parameters for the rule turn out to be such that the regulator de facto reduces the probability of being at the ZLB. At the ZLB, the regulator is less responsive to inflation changes, and the interest rate is more persistent. In the case of Russia, we have got low probability estimate of hitting the ZLB under the current monetary policy and a long-term value of the interest rate of 6%. The gap reaction parameter and interest rate persistence parameter for the current monetary policy are in the range of values for optimal monetary policy rules. The current CPI reaction parameter is much less than the optimal one. This implies a higher probability of hitting the ZLB in the optimum than under the current monetary policy. We also found that under current monetary policy, the likelihood of reaching the effective lower bound (ELB), defined by the alternative households’ ability to save, is quite significant.

Optimal simple monetary policy rules for a resource-rich economy and the Zero Lower Bound